Tips on testing your strategy

Investors who stick to strategy are less likely to be the ones kicking themselves when markets slump.

Everyone feels powerless when the market moves against them. Any sense of accomplishment about building a sturdy little portfolio, whether it’s well founded or not, will take a pounding. But a sudden jolt of despondency will not steel anyone’s resolve to make the best of the situation and seek out opportunities. Instead, judgement will be clouded by frustration and regret.

When these negative vapours enter the air-conditioning all investors struggle. Frustration turns to fear, and all of a sudden the decision-making process is compromised. Of course, we all know it doesn’t make sense. Why should the fundamentals look any different if the investments that once passed due diligence have become much cheaper for whatever reason?

When that happens, investors have to clear their heads.

Here’s how to do it.

BE COLD 

If you didn’t write down reasons for owning a stock it’s time to do so now — but push any subjective analysis to one side and stick to the facts. This has nothing to do with what your friends will think of you for owning a part of XYZ. All that matters is XYZ’s future in a world where your opinion doesn’t count. Switch off all of your emotions and crunch that company from scratch.

BE HONEST

OK, so it’s hard to be completely objective. Well, now’s your chance to be as subjective as you want to be. Write down all your “beliefs” and hopes for every investment you have. How do those beliefs look? Be honest. If your forecasts for growth don’t match up with the market’s, maybe everybody else knows something you don’t?

HOLD STEADY

There is a tendency for investment strategy to slowly drift over the years, even when the claim is made that not even an earthquake could change an approach to asset selection. But if an investor’s personal strategy has worked, and if it makes sense, then they need to be consistent. Anyone who tracks their performance against a benchmark will know how well they’re doing. A good strategy should outlast short-term volatility.

STOP THE NOISE

This one has to be the hardest tip of all, considering the volume of material produced by the financial media and the deep rivers of data churned out by markets. The key is to sift out the emotion in reporting about investment markets, which is almost impossible. If your portfolio is not reflective of the ASX200, wild ups and downs in the index may not matter. Stick to what you know (or what you own) and understand how any volatility is relevant to you.

CUT YOUR LOSSES

Parts of your portfolio are not flesh and blood parts of yourself. Your shares in XYZ are exactly the same as everyone else’s. If they are looking more and more like a bad inclusion every day, you should feel no hesitation about admitting you were wrong and selling. Balance the sense of regret you feel about making a bad decision with the relief that will come when the deed is done. And once you’ve offloaded it, don’t look back.

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